New JSE Indices Offer Trading Opportunities

MONEYWEB, BY BYRON KENNEDY, 23 MAY 2002

Johannesburg — The JSE’s new free-float indices are expected to bring with it a number of potential money-making opportunities for traders. As part of the R160 million venture between the Johannesburg and London bourses, local indices will be calculated in line with international standards in that market capitalisation won’t be the only factor to influence a company’s weight in the relative indices.

From 24 June 2002 companies with restricted free-floats will be penalised in that their market capitalisation levels will be reduced by a predetermined percentage. In turn this will force managers of index tracking funds to tweak their portfolios in line with the revised weightings while another important aspect to consider is the net stock position that futures players hold.

Arthur Buchner, a futures specialist at BOE Securities, explains that in recent weeks this position has changed from being net short to its current status of net neutral to slightly long. What this means is that overall sentiment in the SA futures market has changed from bearish to marginally positive during the course of the past month.

Should that remain the case then the futures impact will be relatively insignificant with much of the price action leading up to the index switch expected to be driven in the main by index tracker funds. Market watchers also expect that most of this stock shuffling will be left almost to the last minute with these funds expected to perform in line with their benchmarks ? such as the Alsi-40 index.

The reason for this is that a portfolio could miss out on, say, part of the gold rally had index trackers already lightened their stake in AngloGold in anticipation of its index related market cap being halved come 24 June. Here is a list of the Alsi-40 stocks that will have their weightings reduced when the new indices are introduced: Security Free float Anglo Platinum 50% Anglogold 50% Impala Platinum 75% Firstrand 75% Nedcor 50% M-Cell 50% Absa 75% Liberty 50% Investec 50% RMB 75% ABI 30% Tongaat-Hulett 50% Coronation Hlds 50% Pick ‘n Pay 50%.

For example: 75% of Impala Platinum’s market cap will be used for index purposes, in other words reduced by 25%. For anyone hoping to cash in on the potential price movements in the week/days ahead of the switch, here are some possible strategies by leveraging positions through individual equity futures, warrants or spreads.

Posted in Market commentary

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